Enterprise value vs Actual price paid
Hi, I was wondering about this a while back.
In an M&A, the purchase price is typically a premium over the current share price. What is the purpose of calculating enterprise value, which is just an approximation of the transaction value when I can calculate the actual purchase price and factor in the net debt separately?
Is it to substantiate the premium that I am paying? But isn't that substantiated by the synergies that I expect to benefit from the transaction?
Or is it for me to compare its valuation multiples to its peer and see if it is over/under valued?
Likely the latter – the premium can be market dependent (i.e. in 2021 tech M&A premiums were MUCH higher than they were at the recent market bottom in 2022) so I would say it's hard to substantiate something that could change a lot in 6 or 12 months
The equity purchase price is a premium over the current share price, and that is the EQUITY VALUE of the company. Shorthanded as 'Purchase Price Premium' but really this is just the equity purchase price premium. To get to the total enterprise value, you add the net debt, as you mentioned. The buyer actually has to pay for the debt too (almost always), to repay it, so the buyer is actually paying the enterprise value, not just the equity value.
Enterprise value is also used to compare valuation multiples, correct.
What if the buyer is only purchasing 80% of the equity stake? Would the buyer still have to assume the debt?
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